Tag Archives: jobs

Will Santa Claus Bring Volatility?

Summary Historically, the holidays provide a brief period of decreasing volatility. This December is filled with unknowns. These unknowns will determine whether stocks finish naughty or nice this year. Hello everyone, I hope you have been doing well. Volatility has turned its head again and is close to backwardation. The purpose of this article is to examine past volatility events and determine the likeliness of a prolonged period of backwardation here. For the basis of discussion, we will use the iPath S&P 500 VIX Short-term Futures ETN (NYSEARCA: VXX ). During the last spike in volatility, VXX performed well and has still not touched the previous lows set in August, see below: (click to enlarge) Historically, this time of year bodes well for inverse volatility products such as the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ). However, this year, the Santa Clause rally has a Federal Reserve rate hike to deal with. The last spike in volatility came on the back of a decision by the Federal Reserve not to raise interest rates. This was taken as a weak sign for the U.S. economy and investors seemed happy to sell off shares to mark the first real correction since 2011-2012. This spike in volatility created a long period of backwardation, see below: (click to enlarge) Now it appears that solid jobs data has put the Federal Reserve back on track for a December rate hike. Financials rallied for a couple of sessions but have since given back the bulk of their gains after news of new capital rules. Retailers were hit hard after very weak guidance from Macy’s (NYSE: M ). Oil stocks continue to take a beating due to stubbornly high inventories and a very strong dollar. What does all this spell for volatility? A very interesting holiday season. Remember back to the article where we discussed the two types of volatility events. You have economic events that drag out over longer periods of time and you have political events that tend to be very short lived. Volatility markets are now struggling with economics. Even though the market recovered, volatility has remained elevated from the ultra-low numbers we saw in the first half of 2015. Volatility investors are becoming more fearful that the U.S. economy may go from slow growth to none at all. Judging by the jobs numbers, the U.S. economy is doing better than most have expected it to. It is going to be a very competitive holiday season for retailers and a warning from one company does not spell doom for the entire industry. After Macy’s warned on traffic, most online retailers remained unchanged. Wal-Mart (NYSE: WMT ) has even changed course and opted to offer almost all of its Black Friday deals online. Times change and industries must change as well to remain competitive. What to Watch For I have three things on my volatility radar right now. Retail sales and the Santa Claus rally deserve to be recognized this time of year. Typically, a positive start will result in subdued volatility. Will online retailers more than make up for slow foot traffic? I believe the answer is yes. Score one for Santa. The mid-December possible government shutdown. I absolutely hate gridlock in politics and government shutdowns really aren’t the image we want to portray. But, those events were some of the easiest money ever made on volatility trades. Here’s a look at VXX during the last government shutdown: (click to enlarge) Score one for volatility. All eyes will be on the Federal Reserve’s December meeting. To hike or not to hike. I believe over the next month or so, the market will price in a hike in rates only leaving the possibility of disappointment in not getting the rate hike they were expecting. Score two for volatility. Conclusion My scorecard shows a higher chance of volatility than we typically see this time of year. If volatility begins to enter overbought conditions by the beginning of December, I will be looking for a short-term short position in VXX or a small long position in XIV. Keep your eye on the ball and wait for an event to play out before you jump in too soon or chase after something that is already gone. It is important to analyze the situation as it develops. We saw during the last volatility event how trigger-happy investors are right now and we could see more of the same should conditions worsen. This should be in your volatility game plan. Thank you so much for reading and for more information on timing the VIX, volatility ETFs, and related volatility education, please check out my library of articles here on Seeking Alpha .

The Generation Portfolio: Rate Fears Consume The Market

Summary Since my last update of the Generation Portfolio, I have added two positions: American Capital Agency Corp. and The Hershey Company. The market had a seesaw week, during which rate hike fears reappeared, but the Generation Portfolio continues to show solid gains. The market’s conclusion that a Fed rate hike is now likely may be premature, and it remains wise to look at oversold sectors such as Energy and Health Care. Background This is a continuation of a series of articles in which I update the progress of a portfolio that I manage for others. You may read my last article in the series here . This is my way of providing a different view of the trading experience apart from close examination of individual securities, and in a sense is a trading diary. The Generation Portfolio has an income focus, with every position paying a dividend. It is not meant to represent a completely diversified portfolio, but only that part devoted to income plays, and is provided for educational purposes. In these articles, I update the progress of the portfolio and give some thoughts on its aims and overall market conditions that affect it. Sector Opportunities There has been some obvious sector rotation over the past year, as shown in the current (as of this writing) chart below of the performance of the 9 Sector SPDRs over the past 52 weeks. I am going to use two sectors, Energy and Healthcare, to show how I use this information. The sector breakdown is a pretty good way to determine what is in favor at the moment, and what is out of favor. However, if you have a long-term focus, it also gives a clue as to long-term possibilities. Everything depends upon time frames, and comparing them can show what may be a good value relative to the overall market. While the energy sector has done poorly over the past year, there are signs that it is in a bottoming process. Changing to the six-month sector chart shows that the energy sector also is down for that time frame, and by almost as much as the 52-week time frame. At this point in the process, the energy sector looks like a bad place to consider putting any funds. An object in motion tends to stay in motion, and when the market moves against a sector, that view can last for a long time. With a long-term view, however, the important thing is to look for changes in sentiment. Let’s look at the three-month chart. The three-month chart shown above tells a much different story than the previous charts. Not only is the energy sector up, it is the third-best performing sector out of the nine total. On the other hand, health care, which was the third-best performer over the past 52-week period, now is at the bottom of the list, with the largest loss. Turning to the one-month period shows the influence of the market’s strong October, which was the strongest month of gains for four years. The three-month data shows that Energy has continued its rebound. In fact, all of the gains from its rebound have been in this time period. Heath care also has rebounded, but not enough to overcome the losses of the past six months. There are many ways to read the fluctuations in the sector data. It is interpretation more than science. You can draw vastly different conclusions based upon your overall outlook. That, as they say, is why they make markets. My take is that energy is in the middle stages of a bottoming process. It still has a long way to climb back to its position of a year ago, and could fall back down to its lows. However, its steadiness over the past three months in addition to the past month suggests to me that downside risk at this point is minimal. Healthcare also appears to be in a resting phase. It is basically flat over the past six months despite its recent bounce. It is in my view in an earlier stage of the bottoming phase than energy. The healthcare sector is likely to grind along the bottom for a while. It could offer some good values during this process. Since the sector already has pulled back, you are not buying at the top, though any sector can fall further depending upon news. Over time, the sectors have offered positive returns, as shown by one more chart of the five-year period. To me, the five-year chart is the most important of all. I have a long time frame, and am not too concerned about the usual short-term fluctuations of the market. Regarding the energy sector, this chart suggests to me that energy overall is not the best long-term growth opportunity. However, even despite the losses of the past year, it is slightly positive. The long-term trend remains higher, and recent losses have done nothing but erase past excesses without actually sending the industry into decline. My conclusion is that the losses of the last year are a buying opportunity for energy stocks, though we already may have seen the bottom. As for healthcare, the five-year chart shows that it is in a massive secular uptrend. It is the biggest gainer of the past five years out of all nine sectors. Global demographic trends support the view that healthcare is not a short-term fluke in terms of growth opportunities, but a long-term opportunity. The media focuses on individual U.S. health care laws and particular demographic groups such as “Boomers,” who are retiring every day. However, as a global issue, the opportunities in health care are not dependent upon domestic political issues, but rather upon a secular upswing in the need for provider services around the world. Thus, pullbacks in the sector also are buying opportunities for the long term. In the financial media, all you hear about are the big social media stocks that have been outperforming, the so-called FANG stocks: Facebook (NASDAQ: FB ), Amazon.com Inc. (NASDAQ: AMZN ), Netflix Inc. (NASDAQ: NFLX ) and Alphabet Inc. (NASDAQ: GOOG ). They indeed have done well this year, and for several years, in fact. However, there also are interesting long-term opportunities in sectors that don’t get nearly as much press, such as health care. I could go through analyses of all the sectors like this, but these are the two that stand out right now. They are good examples of how I approach the sector issue, and new data always influences my views. Investing in the right sectors often turns out well in the end. The Week That Was If October was a great month, November is shaping up as a more mixed affair. Stocks were up on Monday and Tuesday, in a continuation of the market’s good times from last month. However, on Wednesday, Fed Chair Janet Yellen testified by a House Committee that the December Fed meeting is “live,” and that rates could rise. This sent the market lower. Friday’s jobs report showing unexpectedly large jobs gains of 271k solidified the market’s concerns. Transactions I have made two transactions since my last Generation Portfolio article: Added American Capital Agency Corp. (NASDAQ: AGNC ); Added The Hershey Company (NYSE: HSY ). Further details are below. Generation Portfolio To Date Below are the transactions and positions to date in the Generation Portfolio. Below are the transactions to date in the Generation Portfolio. The Generation Portfolio as of 17 October 2015 Stock Purchase Date Purchase Price Latest Price Change Since Purchase WFC 8/25/2015 $ 51.75 $ 55.87 7.92% DIS 8/25/2015 $ 98.75 $115.60 17.13% BMY 8/25/2015 $ 59.75 $ 65.11 9.48% MFA 8/25/2015 $ 7.05 $ 6.81 (3.36%) OHI 8/31/2015 $ 33.95 $ 32.36 (4.21%) CVX 9/02/2015 $ 77.90 $ 94.03 20.71% PG 9/03/2015 $ 69.95 $ 75.57 8.03% CYS 9/04/2015 $ 7.68 $ 7.53 (1.95%) KO 9/09/2015 $ 38.50 $ 41.96 8.99% MPW 9/10/2015 $ 10.89 $ 11.13 2.20% WMT 9/10/2015 $ 64.40 $ 58.88 (8.73%) VTR 9/10/2015 $ 52.80 $50.95 (3.75%) KMI 9/11/2015 $ 29.95 $ 26.14 (12.99%) WPC 9/14/2015 $ 56.75 $ 62.04 9.23% T 9/17/2015 $ 32.50 $33.16 1.98% VZ 9/17/2015 $ 44.95 $45.76 1.81% MMM 9/18/2015 $139.90 $158.73 13.84% JPM 9/22/2015 $ 60.89 $ 68.72 12.92% PX 9/23/2015 $101.30 $113.58 12.12% VER 9/25/2015 $ 7.87 $ 8.25 4.83% WMB 9/28/2015 $ 39.48 $ 37.98 (3.80%) MAIN 9/28/2015 $ 27.47 $ 29.87 8.74% PFE 9/28/2015 $ 32.69 $ 33.72 3.79% TGT 10/16/2015 $ 75.15 $ 76.69 2.75% ABR 10/20/2015 $ 6.38 $ 6.58 2.82% AGNC 10/30/2015 $17.84 $ 17.77 (0.34%) HSY 11/06/2015 $85.45 $ 86.16 0.83% Latest prices and percentages are those supplied by the broker, TD Ameritrade, as of the close on 6 November 2015. A large legacy position in Ford Motor Company (NYSE: F ) and some other small legacy positions are omitted. Kindly note that percentage changes include the impact of reinvested dividends since the beginning of November, so they will not always correlate with the price changes of the stocks. There currently are 27 positions in the portfolio. Of these, 8 are positive positions and nine are negative (I go strictly by the broker’s calculations of gain and loss as of the close, as they know best). According to a spreadsheet that I maintain, the Generation Portfolio overall currently is up between 4% and 5%, a slight drop since the last article. Some dividends are not accounted for in the percentage changes because I only switched to reinvesting dividends recently. Losses in a couple of the energy stocks and interest-sensitive plays were largely balanced by rebounds in bank, retail and entertainment positions. Dividends One of the aims of the Generation Portfolio is to generate dividends, hence the name. Several dividends came in this week and were reinvested. Dividends Received To Date Stock Date Received Reinvested VTR 9/30/2015 No KO 10/01/2015 No CYS 10/14/2015 No VER 10/15/2015 No MPW 10/15/2015 No WPC 10/15/2015 No MFA 11/02/2015 Yes JPM 11/03/2015 Yes T 11/03/2015 Yes VZ 11/03/2015 Yes BMY 11/03/2015 Yes The dividends are split about equally between qualified and non-qualified. Analysis of the Holdings This week confirmed one thing in my mind: that the Fed gets government data well before it releases it to us. One thing that I constantly have to remind myself of is that the market is always right. Trying to argue against price moves is like arguing about the weather: you may have an excellent case, but it is going to rain whenever it wants to anyway. The consensus in the media – and the market – is that the latest jobs numbers were blow-out figures that do not just suggest that the Fed will raise rates at its next meeting, but demand it. That is the consensus view, and it has a lot of merit to it. After all, the numbers did beat expectations. I recently have been in the camp that thought that the economy does not need a rate increase, and that the data does not justify it. Back in February, I took a long look at the situation and decided that my own thinking is that there probably will be some small rate hikes beginning at some point late in 2015, and probably only one tentative rate hike in 2015. So far, if the market consensus is proven to be true, I was spot on with that assessment. I don’t mind being proven right, especially considering that when I made that prediction, the market was pricing in three rate hikes over the next year. Traders see a roughly 70% chance of a rate hike at the December meeting. However, we could all still be wrong. There remains a roughly 30% undercurrent of thought that the Fed won’t raise. I’m not so sure that means anything, because the consensus about this has been wrong all year long (and in 2014, too). However, the traders with such a poor track record sometimes are right, and they are betting with real money, so their view must be respected. Since the media has concluded that the Fed will act, how can this be? (click to enlarge) The graph above of the jobs data over the past decade shows that there was indeed an uptick in the employment numbers last month. However, when you look at the overall trend, does it look as though much has changed? To me, it appears that the jobs numbers have been treading water since 2010. They have settled around an average gain of 200k per month. The variations have declined, so that there is a tighter fit to the trendline in recent months. Completely overlooked by most of the financial media was that the change for September was revised downward, from +142,000 to +137,000. Thus, the jobs gains in October were a bit less than the +271k figure would suggest. As the report also noted that, after all the revisions, “Over the past 3 months, job gains have averaged 187,000 per month.” This compares with another sentence from the report in a different location, “Over the prior 12 months, employment growth had averaged 230,000 per month.” I don’t know about you, but I do see a trend there – downward. Also noted in the report is that “Hourly earnings have risen by 2.5 percent over the year.” Many feel that this cinches the case for a rate hike, because it suggests that the inflation rate – the other arm of the Fed’s dual mandate – must follow suit. The Fed all along has said that it considers 2% inflation to be its threshold for raising rates. So far, that threshold has not been met. Also completely ignored by the media was that “The average workweek for all employees on private nonfarm payrolls remained at 34.5 hours in October.” That is not a sign of a tightening labor market. (click to enlarge) Strangely enough, though, even after this “hot” jobs report, the very same market consensus that is pricing in a December rate hike also continues to price in inflation expectations well below 2% (though they have ticked up slightly). That this is an internal contradiction does not seem to have occurred to many people. The bottom line is this: recall that the Fed has two mandates, not just one, and neither is really justifying a rate hike right now. All of these quibbles, aside, the media has decided that the market has decided that the Fed will raise rates in December, to wit: It’s interesting to note that before this week, everyone who was predicting a rate hike in December was saying that there needed to be two hot jobs reports before then to justify such a hike. Now, apparently, the market has concluded that only one seals the deal. And that is all well and good, but for one nagging detail: this latest jobs report was not “stellar,” it was barely above average for the past year. Apparently one good, not stellar, jobs report is all the market needs now to consider the economy to be on fire. Times have changed. The market has been manic on this issue for years now. It see saws between unblinking conviction that a rate hike must happen, and now, and complete certainty that the economy would not support one. The truth lies in between. A rate hike may be on the table, but then, it has been all year and nothing has happened. With earnings season now largely behind us, it’s time again for Fed frenzy. The Fed can and will do what it feels best. My analysis from February easily could be proven right in the end, and there will be one Fed move in 2015. Personally, I wish the Fed would raise rates and get it over with, the suspense and uncertainty has been far worse for capital allocation than past rate hikes have proven to be in actuality. Whether the Fed actually does raise rates, though, remains very much an open question. The best move in this uncertain environment is to stay diversified, hedge your bets and watch your sectors for opportunities. Conclusion The Generation Portfolio remains solidly in positive territory, and the dividends have begun rolling in. After a spectacular October for the market, prices retreated as the odds of a Fed rate hike grew. However, Fed action is not a certainty, and there is another jobs report left before the December Fed meeting. This remains a good time to maintain a diversified portfolio that takes into account all possibilities, and to watch for undervalued sectors which may pay big gains over the longer term.

Who Will Win And Who Will Lose When The Fed Raises Rates In December

Summary Analysis of the jobs report. Explains why bonds and other interest rate sensitive investments will suffer. Explains why stock picking through logic and common sense is back. Today, we had great news as the US jobs report finally showed signs that the economy may be improving as 271,000 jobs were created, beating economists’ estimates of 180,000, while the unemployment rate fell to 5% for the first time since 2008. This is where the jobs were created: (click to enlarge) But the most important thing about the report is that the average hourly wage finally spiked up for the first time in a long time. Janet Yellen and her gang at the Fed are going to party this weekend, as the release valve from the tremendous bone crushing stress that the Fed officials have been under has just opened, and this report is all the evidence the Fed will need to raise interest rates (for the first time since 2004) when it meets in December. That means that the party of free money at zero interest rates will finally come to an end. The Fed will start raising rates in December and then will probably start raising rates at about .75% per year for the next 5 to 7 years, bringing interest rates eventually in line with the historical average rates. Who will suffer and who will benefit? Well, those who will suffer are: 1) Anyone owning commodities like gold, silver, oil, etc., as the US dollar (NYSEARCA: UUP ) will continue to rise, and since many of these commodities are priced in US dollars, they will fall. You can see evidence of that in the price of gold (NYSEARCA: GLD ), which just hit a 5-year low today on the news. (click to enlarge) So anyone owning commodities or the companies that mine them (NYSEARCA: GDX ) is in for some serious pain going forward. Now, the only thing that can save commodity producers and miners is if inflation starts its way back up. The Fed has to move quickly as the last time we had such low interest rates was in 1973, and from 1974 to 1980 inflation erupted and interest rates went from 3% to 19% in six years. We are currently in a deflationary period and there is little threat of inflation right now, but the Fed needs to get ahead of the curve and move because hyperinflation is serious business, and if one ever lets that genie out of the bottle, it is almost impossible to curtail it. 2) Bond holders (NYSEARCA: TBT ), insurance companies, dividend investors, car manufacturers and dealers, home builders, realtors, furniture/appliance manufacturers, utilities and companies doing buybacks will start feeling the pain coming up. Since investors will start getting higher interest rates on new bonds issued and with savings deposits at banks, with every quarter-point rate increase by the Fed, those holding older bonds will probably sell them to buy the new ones issued at a higher rate. So, what you will see is the opposite of how refinancing your house works, for example. When you refinance your home, you pay off your old mortgage and get a new lower rate. But when you refinance your bonds, you are looking for a higher rate of interest and thus will sell them to buy the new ones. So those holding older bonds will see investors in those bonds sell them, chasing the higher rate and buying new ones. When they sell, the principal of those older bonds goes down as the yield that each one pays has to match the new bonds. So, if rates keep rising, then more and more people will be selling their bond holdings. The biggest holders of bonds are insurance companies (NYSEARCA: IAK ), so insurers will feel the pain as the products each offers, like annuities, will need to pay higher rates of interest to stay competitive, while the principal value of each companies’ bond holdings will slowly decline. So for insurers, it’s a double-edged sword. Dividend investors will suffer as the army of investors chasing dividends will have another safer option to invest in to get interest (like CDs at banks) so companies such as utilities, master limited partnerships (NYSEARCA: AMLP ), REITs (NYSEARCA: IYR ), etc., will have to raise dividend rates, which means each will have to borrow more at the new higher rates to pay them. As each borrows more, the underlying business suffers as costs increase, but revenues and profits stay the same. In my opinion, interest rates will constantly rise at about .75% per year, thus those companies currently borrowing at zero interest rates will no longer be able to do so and thus will curtail buyback plans and stop raising dividend payouts. Management will actually have to grow their companies’ bottom lines and invest in growth. This action will be a paradigm shift and will spur capital expenditures, which will grow the manufacturing base, and those companies that make industrial equipment (NYSEARCA: IYJ ) may benefit. As interest rates rise, home prices will stop rising and demand will slow as mortgage rates will go up and that will hurt home builders and realtors (NYSEARCA: ITB ) as there will be fewer buyers and a lot more sellers. Those who have been successfully flipping houses will finally find an urgent need to dump their entire portfolios of homes in a hurry. Back in 2009, hedge funds bought millions of homes in foreclosure and have since seen those homes rise in value. I would assume these hedge funds will start flooding the markets by putting those homes all up for sale ASAP. So, if you were thinking of selling your home, you better move it. Utilities (NYSEARCA: IDU ) will start to tank as the only reason investors really buy them is for the dividend yield. Since maintenance CapEx charges on utilities have always been very high, utilities, in order to pay out a dividend, have always borrowed money to do so. Thus, each will suffer as interest rates rise and borrowing costs do so as well. The party for car manufacturers and dealers will soon be over as each will no longer be able to offer zero interest rate financing. I went and bought a new Toyota (NYSE: TM ) Tundra truck recently as I wanted to lock in the rate but will not be buying anything again for ten years. So if you are in the market for a car, go buy it soon. The same goes for furniture and home appliances; lock the rates in because you will not see these sweetheart deals anytime soon. Those who will benefit from rising interest rates are: 1) Stock pickers will benefit as investors start to rebalance their portfolios, removing those industries mentioned above and go for more growth and value investments based on each company’s Main Street operations instead of dividend payouts and buy backs. I have not been in a rush to buy anything as I knew this scenario and major paradigm shift was coming and that the markets would be effected as a rebalancing of portfolios will start soon. The companies I have bought have extremely high free cash flow and thus are not going to be much affected by rising interest rates. Most of them are duopolies like Lockheed Martin (NYSE: LMT ), Boeing (NYSE: BA ), Visa (NYSE: V ) and MasterCard (NYSE: MA ), while others operate with very little, if any, debt at all like FactSet (NYSE: FDS ) Biogen (NASDAQ: BIIB ), Michael Kors (NYSE: KORS ), Gilead Sciences (NASDAQ: GILD ) and Accenture (NYSE: ACN ) and have FROICs of 30% or higher. For those interested in more information on how I picked those stocks, you can find out more by going HERE . I also own Apple (NASDAQ: AAPL ) and here is my Friedrich Research on it that shows you why I bought it: (click to enlarge) Multinational firms may suffer due to the strong US dollar, so the smart investor may want to concentrate on those companies that buy supplies or have products manufactured outside (like Apple does) of the US, as the stronger dollar will buy more bang for the buck while those who export will suffer as customers overseas will be buying less as their currencies weaken. Going forward, what is coming up will be a stock pickers’ dream market, where those who should outperform are those who actually do the research and due diligence to get the story right. Investors will no longer be able to buy anything and watch it go up automatically, as the rising tide will now just be calm water and will no longer lift all boats. Investors will need to buy the right stocks and get the story right. The free ride of markets backed up by the Federal Reserve’s zero interest rates will be officially over when the Fed raises rates in December. The next few months will be a rebalancing of portfolios toward growth and value investing instead of index/dividend/buyback investing. Analysts, portfolio managers and stock brokers are now going have to actually work for a living as the free ride of just putting their clients’ money in index funds, bonds and ETFs and watching them go up every day automatically (as more and more people pile in) will no longer be profitable as the party there is over. As a result, more and more people will become confused at this paradigm shift, as most of them were not investors prior to 2004 and don’t know what a rising interest rate cycle is like. Once the Fed starts raising rates, it usually raises for 5 to 7 years, but the Fed will be raising for at least that much this time around, as it is starting from zero and that’s a long way away from the historical average rate. So, in conclusion, the tide will now start rolling out and you will finally see those who are naked and without a clue on how to invest, as they can no longer rely on the Fed Tide lifting all boats. Momentum investors will get crushed as those companies that buy other companies with zero debt will finally not be able to do so anymore, so mergers and acquisitions will come to a screeching halt as will IPOs. As for me, I am very excited as I will be using my Friedrich algorithm and slowly building a strong portfolio of growth/value investments that I can hold for a while as the Fed begins its moves in December. Those who will benefit are those who use logic and common sense, and more importantly, who know what they own and why. With the Fed out of the picture, as of December, logic and common sense should rule the day.